Financial Terms / C - D / Commission

What is commission?

Commission is a form of payment you receive for making a sale. It's often an additional income on top of your base wage or salary, but some jobs rely solely on commission. The amount you earn depends on your sales performance.

There are several types of commission structures:

1. Salary plus commission: You get a base salary and extra commission for sales. This offers a guaranteed income plus the chance to earn more.
2. Straight commission: Your only income comes from sales. You have complete control over your earnings, with no salary cap.
3. Draw against commission: You receive a set amount upfront, called "the draw." If you sell more than this amount, it becomes your income. Everything else is commission.
4. Tiered commission: This uses a tier system for calculating commission. For example, you might earn 5% on the first $6,000 of sales and 2% on the remainder.
5. Team-based commission: This structure is based on overall team performance, encouraging collaboration and healthy competition.
6. Product-specific commission: Different products have varying commission rates, often higher for premium or hard-to-sell items.

How Commission Structures Work

Commission structures vary depending on the company and industry. You'll find different methods to calculate and pay commissions.

Calculation methods include:

1. Percentage-based: You earn a set percentage of each sale.
2. Tiered: Your commission rate increases as you sell more.
3. Gross profit: Your commission is based on the profit margin of each sale.

Payment frequency can be monthly, quarterly, or annually. Some companies offer bonuses for meeting specific targets.

Performance targets play a crucial role. Companies use SMART goals:

• Specific
• Measurable
• Assignable
• Realistic
• Time-related

These targets should motivate you without being unrealistic. Your employer should provide the resources you need to achieve them.

Caps and thresholds are common in commission structures. A cap limits the maximum commission you can earn in a period. Thresholds set minimum sales levels before you start earning commission.

Remember, commission structures aim to balance motivation and cost control for the company. Understanding your structure helps you maximize your earnings potential.

Benefits and Drawbacks of Commission-Based Pay

Commission-based pay has both advantages and disadvantages for you and your employer. Let's look at the pros and cons:

Benefits:

1. Motivation boost: You're encouraged to work harder as your income depends on your performance. The more sales you make, the more you earn.
2. Skill development: To increase your earnings, you might seek out workshops or courses to improve your skills.
3. Company growth: Your success contributes to the company's growth, potentially creating more opportunities for you.
4. Cost management: For employers, this structure helps manage payroll expenses, especially for underperforming employees.

Drawbacks:

1. Income instability: Your earnings can vary widely, making personal financial planning challenging.
2. Pressure and burnout: The drive to meet sales targets can lead to unhealthy work practices and stress.
3. Limited benefits: Many commission-based roles offer minimal or no additional benefits like health insurance or paid leave.
4. Negative team dynamics: Large income differences between colleagues can create envy and resentment.
5. Overly aggressive sales: Some salespeople might use high-pressure tactics or fail to explain products fully, focusing solely on commissions.

Remember, the key is finding a balance that motivates you without causing undue stress or encouraging unethical practices.

Legal and Ethical Considerations

Commission-based pay comes with legal and ethical considerations you need to know. The Fair Labor Standards Act (FLSA) sets rules for minimum wage and overtime pay. You must earn at least the federal minimum wage of $7.25 per hour, including commissions.

For overtime, you're entitled to 1.5 times your regular pay rate for hours over 40 per week. This includes commissions, unless you work for certain retail or service establishments that meet exemption conditions.

To qualify for the Section 7(i) overtime exemption:

1. You must work for a retail or service establishment
2. Your regular pay rate must exceed 1.5 times the minimum wage
3. More than half your earnings must come from commissions

Keeping accurate records is crucial. Both you and your employer should track hours worked and commissions earned. This helps resolve disputes and ensures compliance with labor laws.

Written contracts or policies governing commission payments are wise. They provide guidance in case of disagreements. If you face issues with unpaid commissions, you can file a complaint with the Wage and Hour Division of the U.S. Department of Labor.